Thales : 2017 Half-year results - Press release

• Solid order intake: €6.0 billion, up 10%
• Sales: €7.24 billion, up 5.9% on an organic basis1
• EBIT2: €637 million, up 16% (up 17% on an organic basis)
• Adjusted net income, Group share2: €424 million, up 15%
• Consolidated net income, Group share: €336 million, down 12%
• Very good level of free operating cash flow2 for a first half year: €216 million (H1 2016: €45 million)
• 2017 objectives confirmed

Thales's Board of Directors (Euronext Paris: HO) met on 25 July 2017 to review the financial statements for the first half of 20173.

Patrice Caine, Chairman and Chief Executive Officer, commented: "At the end of June, Thales is once again confirming its growth momentum, with a solid order intake and a 5.9% organic sales growth, ahead of the full year target. The Group's profitability continues to increase, with EBIT and adjusted net income up by more than 15% for the third year in a row. At the same time, we are stepping up our R&D investments, which increased by more than 10% in H1 2017, in order to reinforce our technological leadership. These results reflect the strength of our business model and its ability to create value."

"In parallel, the Group is consolidating its leading position in the digital transformation of its markets. We are investing €150 million over three years to set up a cross-functional 'digital factory' in order to capitalise on our unique portfolio of digital technologies. The strategic acquisition of Guavus, which is currently underway, will enable us to implement real-time big data solutions on an industrial scale across all of our businesses."

"The first half reinforces our confidence in Thales's ability to achieve its full year targets and, as a result, record another year of growth in sales and profit."

1 In this press release, "organic" means at constant scope and currency.

2 Non-GAAP measures, see definitions in the appendices, page 9. The definitions of EBIT and adjusted net income were adjusted as of 1 January 2016 to exclude expenses recognised in income from operations that are directly attributable to business combinations. These adjustments are detailed on pages 11 and 12. In H1 2017, they impacted EBIT in an amount of €10 million and adjusted net income in an amount of €7 million (€7 million and €5 million in H1 2016). 3 The limited review of the financial statements has been completed and the statutory auditors' report has been issued following the meeting of the Board of Directors.

H1 2017 order intake amounted to €5,972 million, up 10% compared to H1 2016 (up 10% at constant scope and currency). The commercial dynamics remained solid in all of the Group's businesses. At 30 June 2017, the Group's order book stood at €31.9 billion, which represents almost 2.1 years of sales, improving visibility for the businesses in the coming years.

Sales in H1 2017 came to €7,241 million, up 5.8% on a reported basis, and up 5.9% at constant scope and currency ("organic" change). Emerging market1 sales maintained a high level of growth (15% organic growth, after 14% in H1 2016), while sales in mature markets1 recorded moderate organic growth of 2.2%. Emerging markets thus accounted for 32% of the Group's sales in the period, compared to 24% in H1 2014 and 29% in H1 2016.

In H1 2017, consolidated EBIT was €637 million (8.8% of sales), compared to €551 million (8.1% of sales) in H1 2016. EBIT benefited in particular from the on-going operational recovery of the Transport segment as well as the solid performance of the Aerospace and Defence & Security segments.

1 In this press release, "mature markets" include Europe, North America, Australia and New Zealand. "Emerging markets" include all other countries: Asia, Middle East, Latin America and Africa.

2 At 31 December 2016.

3 Non-GAAP measures, see definitions in the Appendices, page 9.

Standing at €216 million, free operating cash flow was positive in H1 2017 as in the prior-year period, driven by the good performance achieved in terms of working capital and by the temporary slowdown in operating investments. At 30 June 2017, net cash amounted to €2,294 million, down €72 million compared to 31 December 2016, but up €855 million over the last 12 months (€1,439 million at 30 June 2016).

Other 38 28

Order intake in H1 2017 stood at €5,972 million, an increase of 10% year-on-year (10% at constant scope and currency2). The book-to-bill ratio was 0.82 for H1 2017 (versus 0.79 in the prior-year period), and

From a geographical perspective1, order intake was broadly stable year-on-year in emerging markets (€1,571 million, down 3%), while it was solid in mature markets, where it rose 16% to €4,401 million thanks to performances in France (up 51%) and North America (up 42%).

Order intake in the Aerospace segment stood at €2,238 million, up 1% from €2,218 million in H1 2016. Commercial Avionics orders maintained their positive momentum. The In-Flight Entertainment and Connectivity business recorded solid growth, driven by the booking of a large order during the period. Despite the two contract wins listed above, order intake for the Space segment declined year-on-year.

At €662 million, order intake in the Transport segment was up 31% compared to H1 2016, lifted notably by the contract for the regional express train linking Dakar to the city's new airport.

Order intake in the Defence & Security segment rose 14% to €3,035 million, from €2,670 million in H1 2016, reflecting in particular the good momentum in equipment for military aircraft and vessels and in secure information and communication systems.

Other 27 37

1 See table on page 14.

2 Mature markets: Europe, North America, Australia, New Zealand. Emerging markets: all other countries. See page 14.

Sales for H1 2017 stood at €7,241 million, compared to €6,846 million in H1 2016, up 5.8% on a reported basis1, and up 5.9% at constant scope and currency ("organic" change), driven by good momentum in all segments.

From a geographical perspective2, this sound performance reflected both a continued strong growth of 15.1% in emerging markets (14.2% in H1 2016) and moderate organic growth of 2.2% in mature markets (6.8% in H1 2016).

Sales in the Aerospace segment totalled €2,872 million, a 7.7% increase compared to H1 2016 (7.2% increase at constant scope and currency). The Avionics and In-Flight Entertainment businesses maintained their positive dynamic, driven in particular by the increase in deliveries of avionics systems to Airbus. Only sales of tubes and imaging systems declined, reflecting the cooling of the world satellite market. Sales in the Space segment continued to grow strongly thanks to contracts signed in 2015 and 2016, notably with commercial and military customers.

In the Transport segment, sales totalled €711 million, broadly stable compared to H1 2016 (down 0.9%, or down 0.1% at constant scope and currency). This performance can be attributed to an unfavourable basis of comparison, with H1 2016 benefiting from the combined effect of the start of invoicing on the three major urban rail signalling contracts won in 2015 and of the return to schedule for projects impacted by execution delays. When compared to H1 2015, sales for the segment have continued on a strong growth trajectory (up 29% at constant scope and currency).

Sales in the Defence & Security segment represented €3,631 million, up 6.1% compared to H1 2016 (up 6.5% at constant scope and currency). Almost all businesses contributed to this momentum. The Land and Air Systems business recorded steady growth, notably in missile electronics and protected vehicles, with the ramp-up of the Hawkei vehicle supply contract with the Australian Defence Force. The Defence Mission Systems business benefited in particular from a high level of activity in combat aircraft systems. Only the Secure Communications and Information Systems business experienced a slowdown, with the positive dynamic in military networks and infrastructure systems offset by declining sales in radio communication products.

The Group continues to work on the implementation of IFRS 15 - Revenue from Contracts with Customers and plans to provide an update on the impact of this standard when it will disclose its Q3 2017 order intake and sales.

1 Taking into account a negative exchange rate effect of €16 million and a net positive scope effect of €7 million, mainly related to the consolidation of Vormetric on 16 March 2016 (Defence & Security segment) and to the disposal of the identity management business in Q2 2017 (same segment).

2 See table on page 14.

Other - excluding Naval Group (formerly DCNS) (34) (29)

Naval Group (formerly DCNS) (35% share) 27 20 +37% +37%

In H1 2017, consolidated EBIT1 was €637 million, or 8.8% of sales, versus €551 million (8.1% of sales) in H1 2016.

The Aerospace segment posted EBIT of €263 million (9.2% of sales), versus €239 million (9.0% of sales) for the same period in 2016. The segment maintained good margins, the increase in R&D expenses (up 17% year-on-year) being offset by lower sales and administrative expenses.

EBIT for the Transport segment continued to recover, amounting to €6 million (0.9% of sales) compared to a negative €12 million (negative 1.6% of sales) in H1 2016. This performance demonstrates the business' gradual return to profitability as earlier low- or zero-margin contracts are delivered.

In the Defence & Security segment, EBIT increased significantly to €374 million (10.3% of sales) versus

€334 million in H1 2016 (9.8% of sales). The wider margins reflected the good sales dynamic as well as savings on fixed costs and lower restructuring charges.

1 Non-GAAP measures, see definitions in the Appendices, page 9.

At €2 million in H1 2017 versus €1 million in H1 2016, net interest income remained very low. Other adjusted financial income (expense)1 amounted to a net expense of €20 million in H1 2017, compared to a net expense of €4 million in H1 2016, primarily due to a less favourable foreign exchange performance. Finance costs on pensions and other long-term employee benefits1 remained stable (€31 million, versus €34 million in H1 2016), with the rise in pension obligations offset by a decline in discount rates.

As a result, adjusted net income, Group share2 was €424 million versus €367 million in H1 2016, after an adjusted tax charge1 of €139 million, compared to €117 million in H1 2016. The effective tax rate amounted to 27.0%, compared to 26.2% in H1 2016.

For the first six months of 2017, free operating cash-flow amounted to €216 million, up from €45 million in H1 2016. This sound performance primarily reflects the moderate increase in working capital during the period (€227 million in H1 2017 versus €337 million in H1 2016 and €697 million in H1 2015) and a temporary slowdown in operating investments.

At 30 June 2017, net cash thus amounted to €2,294 million, compared to €1,439 million at 30 June 2016 and €2,366 million at 31 December 2016, after the distribution of €254 million in dividends during the half year (€212 million in H1 2016) and net proceeds of €40 million from acquisitions and disposals in the period, mainly related to the sale of the identity management business, completed in May 2017.

The H1 2017 results are in line with expectations. In this context, the Group confirms all its objectives, as set out below.

Thales should continue to benefit from positive trends in most of its markets. Although below the highs recorded in 2015 and 2016, the order intake in 2017 should remain brisk, at around €14 billion.

1 See the tables on pages 11 and 12.

2 Non-GAAP measures, see definitions in the Appendices, page 9.

Sales in 2017 should see mid-single digit organic growth compared to 2016.

This positive trend, combined with continuing efforts to improve competitiveness, should result in Thales delivering between €1,480 million and €1,500 million in EBIT (based on February 2017 scope and exchange rates), representing an increase of 9% to 11% versus 2016.

Thales also confirms its mid-term objectives of mid-single digit organic sales growth on average in the 2016-2018 period, and an EBIT margin of between 9.5% and 10% in 2017/2018.

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This press release may contain forward-looking statements. Such forward-looking statements represent trends or objectives, and cannot be construed as constituting forecasts regarding the Company's results or any other performance indicator. Actual results may differ significantly from the forward-looking statements due to various risks and uncertainties, as described in the Company's Registration Document, which has been filed with the French financial markets authority (Autorité des marchés financiers - AMF).

Thales is a global technology leader for the Aerospace, Transport, Defence & Security markets. Thanks to its 64,000 employees in 56 countries, Thales recorded sales of €14.9 billion in 2016. With over 23,000 engineers and researchers, Thales has a unique capability to design and deploy equipment, systems and services to meet the most complex security requirements. Its unique international footprint allows it to work closely with its customers all over the world.

www.thalesgroup.com

About Thales

Contacts

Thales, Media Relations

Cédric Leurquin

+33 1 57 77 86 26

pressroom@thalesgroup.com

Thales, Analysts/Investors

Bertrand Delcaire

+33 1 57 77 89 02

ir@thalesgroup.com

In this press release, amounts expressed in millions of euros are rounded to the nearest million. As a result, the sums of the rounded amounts may differ very slightly from the reported totals. All ratios and changes are calculated based on underlying amounts, which feature in the consolidated financial statements.

"Organic change" measures the movement in monetary indicators excluding the effects of changes in exchange rates and scope of consolidation. It is defined as the difference between (i) the indicator for the prior period, recomputed at the exchange rate applicable for the current period to entities whose reporting currency is not the euro, less the contribution of entities divested during the current period, and (ii) the value of the indicator for the current period less the contribution of entities acquired during the current period.

In order to facilitate monitoring and benchmarking of its financial and operating performance, the Group presents three key non-GAAP indicators, which exclude non-operating and/or non-recurring items. They are determined as follows:

• EBIT, an adjusted operating indicator, corresponds to income from operations plus the share in net income of equity affiliates, before the impact of entries relating to the amortisation of intangible assets acquired (purchase price allocation - PPA) recorded as part of business combinations. From 1 January 2016, it also excludes the other expenses recorded in income from operations that are directly related to business combinations, which are unusual by nature.
• Adjusted net income corresponds to net income, excluding the following items and net of the corresponding tax effects:

  • amortisation of acquired intangible assets (PPA) recorded as part of business combinations;

  • expenses recognised in income from operations that are directly related to business combinations, which are unusual by nature;

  • gains and losses on disposals of assets, changes in scope of consolidation and other;

  • changes in the fair value of derivative foreign exchange instruments (recognised under "Other financial income and expenses" in the consolidated financial statements);

  • actuarial gains (losses) on long-term benefits (recognised under "Finance costs on pensions and other long-term employee benefits" in the consolidated financial statements).

• Free operating cash flow corresponds to the net cash flow from operating activities before contributions to reduce the pension deficit in the United Kingdom, and after deducting net operating investments.

Readers are reminded that only the consolidated financial statements at 31 December were audited by the Statutory Auditors, including the calculation of EBIT, which is described in Note 2 "Segment Information" to the consolidated financial statements, and free operating cash flow, which is described in Note 11.1. Adjusted financial information other than that provided in the notes to the consolidated financial statements is subject to the verification procedures applicable to all information included in this report.

The impact of these adjustment entries on the profit and loss account for H1 2017 and H1 2016 is presented in the tables on pages 11 and 12. Calculation of free operating cash flow is outlined on page 13.

(*) Including expenses related to acquisitions recorded in income from operations. See definitions of EBIT and adjusted net income on page 9.

(**) Included in "Share in net income of equity affiliates" in the consolidated income statement and in "Net income" in the adjusted income statement.

(*) Including expenses related to acquisitions recorded in the income from operations. See definitions of EBIT and adjusted net income on page 9. (**) Net cost of bad debts and receivables impairment have been reclassified from "Marketing and selling expenses" to "Cost of sales".

(***) Included in "Share in net income of equity affiliates" in the consolidated income statement and in "Net income" in the adjusted income statement.